What 2019 Is Going To Look Like For Decentralized Exchanges

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The mystery surrounding the QuadrigaCX exchange, and its nearly $140 million in missing crypto assets owed to its users, has brought attention back to the narrative of exploring replacements to centralized exchanges with decentralized exchanges (DEXs).

While centralized exchanges make a logical go-to for some people, as they can offer higher levels of regulation and customer service, others may claim they tend to mirror improper data practices of the older days of technology.

One of the primary narratives echoed by Nick Szabo’s ‘Trusted Third Parties are Security Holes,’ may fit with what crypto fans think of centralized exchanges and the amount of user trust needed to operate them.

To understand the idea of DEXs, identifying where they have struggled to reach any semblance of competition to their centralized counterparts is mandatory. It has been challenging for DEXs to reconcile their shortcomings in liquidity, user experience and withdrawal processing (mainly because of their technical barriers).

Although some DEXs provide order-matching off-chain, the settlement of trades between users still occurs on-chain - where processing capacity is limited. For instance, blocks on Ethereum currently allocate roughly 8 million GAS per block, which constrains the processing capacity of trades on the network.

IDEX, the better known and largest DEX by volume, uses about 130k GAS per trade, which measured against the per block GAS limit, amounts to a limit of 60 trades per block - or roughly six transactions per second.

The trading execution of DEXs has collateral effects on their volume, which is a mere fraction of the overall liquidity of centralized exchanges.

The difficulty in abstracting away the underlying technical complexity of smart contracts, replacing the role of a trusted intermediary, has restricted the use of DEXs mostly to technical-oriented users.

The success of traditional applications on smartphones and tablets, indicates that poor user-experience is an exceptional hindrance to user adoption, and when combined with poor liquidity and a high technical barrier, it becomes easy to understand why DEXs have struggled to gain traction.

The uncertain regulatory circumstances around DEXs is also necessary to reference, as the SEC charged the EtherDelta founder with running an unregistered securities exchange.

While the challenges facing DEX adoption are evident, the claim of non-custodial transfers, enhanced privacy, and an ecosystem in line with the original cryptocurrency vision, have propelled DEXs to the tables of many development teams.

Proponents and users of popular P2P marketplaces like Bitcoin-focused HodlHodl usually have an ideological predisposition towards privacy - something that is not outspoken among the mainstream.

Facilitating the shift from familiar systems to DEXs, means building platforms that have no observable pitfalls when compared to the current centralized standards.

LADEX, a DEX launched by LATOKEN, has updated their protocol to reduce the amount of GAS consumed per trade, which can reduce lag time on executions and withdrawals of trades after 24 block confirmations. This can also have implications for the security token asset class while remaining compliant with KYC proccesses.

Significant anticipation has also followed Binance’s DEX, which is currently in its public testing phase. Rather than building a DEX on Ethereum, Binance constructed their own blockchain (Binance Chain) for their DEX non-custodial marketplace to run on with much faster trade execution.

As technology in the cryptocurrency sector continues to progress at its rapid pace, expect to see the race for the next-generation of platforms ramp up.

Whether or not pure DEXs or non-custodial hybrids of centralized exchanges are primed for attracting more mainstream users is still a question, facing an industry poised for significant regulation and legislation in 2019.

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